Social stratification under tension in a globalized era

CEPAL REVIEW CEPAL 72 REVIEW DECEMBER 72 2000 7 Social stratification under tension in a globalized era Emilio Klein Sociologist, Multidisciplinary Technical Team, International Labour Organization (ILO), Santiago, Chile klein@oitchile.cl Víctor Tokman Regional Director for the Americas, ILO, Santiago, Chile tokmansc@oitchile.cl The objective of this paper is to explore the effects of globalization on the labour market and social stratification. It is generally held that globalization will bring about progress for nations and people. This, however, is far from clear, since the experience of almost two decades has been raising increasing doubts about the potential net gains and, particularly, the distribution of such gains. Clearly, there are winners and losers among both countries and people. We will concentrate on the effects upon people within countries and refer only to one region: Latin America. Our aim is to identify winners and losers in the globalization process and, particularly, the impact on social stratification. Is globalization leading towards greater social integration within nations, or is social disintegration the result (because only some groups are being integrated, while a majority is progressively excluded)? To analyse this issue, the paper is structured into four parts. The first looks at globalization as an integral part of a policy compact, since it is necessary to consider the impact of the whole package rather than trying to isolate partial effects. The second concentrates on the effects on employment, incomes and equity. The third explores changes in the social structure associated with some of the main processes accompanying globalization. Lastly, we draw some conclusions about the social structure of Latin America during the reform period. SOCIAL STRATIFICATION UNDER TENSION IN DECEMBER A GLOBALIZED 2000 ERA EMILIO KLEIN AND VICTOR TOKMAN

8 CEPAL REVIEW 72 DECEMBER 2000 I Globalization as part of a policy compact Globalization in a restricted sense refers to major changes in trade, finance and information that have taken place in the international economy. This process has not happened in isolation, but as an integral part of a policy package combining internal adjustment measures with changes in the way countries relate to the international economy. Three main processes characterize the emerging situation: globalization, privatization and deregulation (Tokman, 1997). The policy compact followed by most countries, at least in Latin America, came to be known after 1989 as the Washington Consensus (Williamson, 1990). Globalization means that national economies are now more integrated with the international economy and that goods, capital and communications, and also people, are closer together today than ever before in the past. This has been the result both of the opening up of economies and of rapid technological change. Trade and financial liberalization has come about through reductions in tariff and non-tariff barriers resulting from i) multilateral agreements in the General Agreement on Tariffs and Trade (GATT) and the creation of its successor, the World Trade Organization (WTO); ii) new or reactivated integration schemes, such as the North American Free Trade Agreement (NAFTA) and the South American free trade association known as Mercosur; iii) an explosion of bilateral trade agreements during recent years; and, most importantly, iv) unilateral tariff reductions as a key component of the adjustment policy package. Latin American tariffs decreased from an average of between 35% and 100% (minimum and maximum rates) in 1985 to between 14% and 22% in the early 1990s. Diversification of the tariff structure has also been greatly reduced, and is now limited in most countries to three or fewer tariff categories (Tokman, 1999). Globalization opens up new opportunities for growth and job creation, but at the same time affects the determinants of employment and wages and requires regulation to prevent unfair international competition. A preliminary version of this paper was prepared at the request of UNDP as a contribution to the Human Development Report, 1999. For example, given the differences in factor endowment, it is expected that trade from developing to developed countries will largely consist of goods whose production involves intensive use of unskilled labour. This could increase the demand for workers of this type and decrease the gap between the wages of skilled and unskilled labour. If this came about, though, it could combine with the differences in remuneration and labour regulations that obtain between countries to generate trade expansion based on unfair labour practices or increased exploitation of workers. The prospect has sparked an international discussion about how this outcome can be avoided and whether there is a need for additional regulation. While there has been no general agreement on how to proceed, it is clear that nobody postulates the equalization of wages between countries, since this would affect the competitive position of developing countries. Nor is it accepted that trade expansion should be based on labour exploitation. Trade sanctions for those who do not comply with minimum international labour standards have been mooted, but so far the idea has been ruled out because of the danger of their being misused as an instrument of trade protection. There is, however, more general agreement about the need for national and international monitoring to ascertain whether economic progress is being accompanied by social progress and, particularly, by compliance with basic labour standards among all trading partners. This has been incorporated into the International Labour Organization (ILO) Declaration on Fundamental Principles and Rights at Work and its Follow-up, adopted by the International Labour Conference on 18 June 1998. Globalization also affects the determinants of job creation and wages because in open economies the ability to compete becomes a major factor and places constraints on wage adjustments. There now has to be a closer link between wages and productivity than there was in the old economic environment. In closed economies, wage increases in excess of productivity growth can be transferred to prices, resulting in inflation; in open economies, the outcome is a reduced capacity to

CEPAL REVIEW 72 DECEMBER 2000 9 compete. In addition, demand fluctuations mean that companies have to be able to adapt faster and show greater flexibility in production and labour processes. Privatization is the second feature of the new economic environment. Privatization reduces the size and functions of government and increases the importance of the private sector and markets in the management and allocation of resources. Public-sector employment naturally falls, rationalization by the new owners reduces total employment and public-sector enterprises are transferred to national or international capitalists, the main motive being the need to reduce budget deficits during adjustment. Increasingly, furthermore, responsibility for investment is transferred to the private sector and public investment is limited to basic infrastructure and social sectors, with growing private-sector involvement in the execution and management of these. Deregulation is the third process in this new environment. This has meant reducing protection and government intervention in trade, finance and labour markets. As was mentioned earlier, trade and financial liberalization are leading to increased globalization, while product and labour market protection is being reduced in order to increase economic efficiency and enable markets to play a greater role in the allocation of resources. The deregulation process has in part been driven by substantial legal reforms, but there has also been a considerable de facto increase in flexibility brought about by the unfettered operation of markets. The threefold process of globalization, privatization and deregulation is occurring in an international environment characterized by universalization of economic and social problems and by increased ideological homogeneity. Today, employment problems and social exclusion are no longer to be found solely in developing countries, but constitute a major challenge even in the more developed economies of the world. Unemployment in some of the industrialized countries of the Organisation for Economic Co-operation and Development (OECD) is stubbornly high; more than 30 million people are officially classified as unemployed, while a further 10 million are no longer actively seeking work (OECD, 1994 and ILO, 1996). The average rate of unemployment exceeds 10% and in the case of some vulnerable groups, like young people, one in five is jobless in many countries. The end of the Cold War broke down ideological barriers, and today s conflicts are caused less by ideological divergence and more by local interests or by a natural reaction against the social cost of adjustment. The three processes are interrelated in both practical and analytical terms. On the analytical side, globalization could not have advanced had it not been accompanied by the other components of adjustment that reduced trade protection, as well as by financial liberalization and privatization with all the opportunities these opened up for increased trade, capital flows and foreign direct investment. All these policies contributed to the attainment of macroeconomic balance, but they were also necessary conditions for integration into the world economy. These sets of policies were fully incorporated into the Washington Consensus, together with instruments designed to help secure fiscal discipline. The latter were included with the main objective of ensuring price stability, but they also play an important role in creating incentives for capital inflows in a framework of greater stability. Indeed, the one thing that has not been liberalized is the movement of unskilled workers. Some retrospective policies regularizing illegal migration have been introduced, but closed borders, or at least tight regulation of flows, continue to be the rule. The recent economic history of Latin American countries shows that, in practice, globalization has been accompanied by privatization and deregulation. The timing and policy mix has varied according to country and it is perhaps premature to evaluate the results. Only five countries Brazil, Chile, Colombia, Costa Rica and Uruguay have attained a per capita income level higher than in the pre-crisis period. Even fewer have achieved a high and sustained rate of growth, Chile and Colombia being the only countries that have been able to expand at more than 5% a year for four consecutive years. Growth rates have been erratic and stop-go cycles have been the norm. In addition, other factors have influenced performance. Initial conditions were different in each country: some started the reform process early, others only in the late 1980s or early 1990s. The policy mix at each stage was also different. In spite of the differences, after a decade and a half of adjustment it can be concluded that all Latin American countries have been involved in the globalization and adjustment process, and that privatization and deregulation have been an integral part of the policy compact. The results are still unclear and policy instruments are continually evolving, but it is plain that the region is today more open and integrated into the world economy, more privatized and less regulated than it was before 1980. All these things have happened simultaneously; hence, any analysis of results should take account of the context. This is what we shall do in the rest of this paper.

10 CEPAL REVIEW 72 DECEMBER 2000 II Employment, incomes and equity under globalization 1. The effects anticipated Globalization is expected to have two main effects on labour and incomes. Firstly, productivity gains, particularly in tradable sectors, should result in increased employment and lower prices in those sectors. The latter should also result in improved real incomes and welfare for the population. Secondly, increased wages in export sectors, assumed to be more intensive in unskilled labour, should result in a reduction of wage differentials by skill level and, hence, in increased equity. The reduction or elimination of tariffs and nontariff barriers should lead to a fall in the relative prices of tradable goods. This would result, on the production side, in factors being reallocated to export sectors and, on the consumption side, to expenditure being reallocated to imported goods and services. Consequently, there should be a positive effect on employment resulting from export growth, while reductions in the relative prices of importable goods should lead to an increase in real incomes. Trade liberalization should therefore result in increased welfare. In the short run, however, the employment growth resulting from increased exports could be offset by a decrease in employment in sectors that compete with imports. Increased competition in these sectors forces enterprises to increase productivity, generally at the expense of employment. The net employment effect of economic opening will depend on the demand for labour in both tradable and non-tradable sectors and on labour supply dynamics. This, in turn, will affect average wages in each sector. Another anticipated result of trade liberalization is that it will lead to a rise in the relative prices of developing country goods whose production involves intensive use of unskilled labour. This would lead to an increase in the demand for unskilled workers and a rise in their relative wages. As a consequence, wage dispersion would diminish. 1 1 For a discussion of the theoretical foundations of this expectation and its empirical validity in developed countries see, among others, Bhagwati and Dehejia (1993), Lawrence and Slaughter (1993), Wood (1994), ILO (1995) and Sachs and Shatz (1994). 2. The results in practice a) Productivity gains and international competitiveness The first of the expected outcomes that is actually observed in most countries is productivity growth in tradable sectors, particularly manufacturing industry. As will be seen below, this outcome is associated with a reduction in the employment level of the sector. During the 1990s, productivity per employee expanded at annual rates of between 5% and 7% in Argentina, Brazil, Mexico and Peru, while the rate was about 3% in Chile. The effects on international competitiveness vary depending on the country studied and the indicators used to measure labour costs. It is usually argued that overpriced labour can affect access to international markets, and in a more competitive environment costs do indeed matter. Overpriced labour can be the result of higher wages or high non-wage labour costs or both. The situation in most Latin American countries does not seem to justify the priority given to this issue (except for some necessary adjustments). Although they have recently recovered somewhat, wages in most Latin American countries are still lower than in 1980. Minimum wages were 26% lower on average in 1999 than in 1980, but wages in manufacturing industry rose by 2.9% in the same period. Nonwage labour costs vary from country to country, ranging from 38% to 64% of wages. In the case of Chile and Argentina, non-wage labour costs are higher than in Korea, similar to those of the United States, and much lower than those prevailing in European OECD countries. Hourly labour costs in Latin American manufacturing industry range from US$ 2.10 to US$ 6.50; this is between one third and one eighth of the United States level and less even than in the South-East Asian countries. Labour cost differences per unit of output are smaller due to higher productivity in competing countries (table 1). This shows what a high priority has to be given to raising productivity, as opposed to merely cutting costs, if competitiveness is to be improved (Tokman and Martínez, 1999). The fact that relative labour costs are not high does not mean there is no scope for making adjustments to the labour cost structure to reduce them further and,

CEPAL REVIEW 72 DECEMBER 2000 11 TABLE 1 Selected countries: Labour costs and international competitiveness a Hourly Non-wage Hourly cost Labour costs Annual changes 1990-1995 wage labour costs of labour per unit of Labour Produc- Competitiveness (dollars) as % of wages (dollars) output costs tivity b (United States = 100) A B A B C Argentina 4.6 42.5 6.5 55-2.0 13.1 7.0 9.2-6.1 3.7 Brazil 3.7 58.2 5.9 60 2.9 8.5 7.5 4.5-0.9 4.3 Chile 2.5 38.0 3.5 43 4.3 9.4 3.2-1.1-5.7 5.9 Mexico 1.9 42.0 2.8 47 1.2 1.5 5.2 4.0 3.6 na Peru 1.3 64.3 2.1 43 5.1 11.6 6.6 1.4-4.5 0.3 United States 12.6 40.3 17.7 100 2.6 3.8-1.2 na Germany 16.1 78.5 28.7 150 2.1 1.8-0.3 na Republic of Korea 6.8 21.9 8.2 60 3.6 11.9 8.0 50.0 Source: Tokman and Martínez (1999), ILO (1998) and updating by authors. a Manufacturing industry, circa 1997. Competitiveness is defined as the difference between changes in productivity and labour costs. b A = Changes in local currency at constant prices, deflated by consumer price index (1990-1995). B = Changes in dollars (1990-1995). C = Changes in dollars between July 1997 and June 1998. particularly, to lower the cost of unskilled labour. Taxes on unskilled workers tend to reduce employment, while some of the existing taxes on the wage bill would be more efficient if they were transferred to other sources of revenue, particularly those that go to finance housing or other investments. The evolution of labour costs in the 1990s also throws up other policy issues for consideration. Labour costs deflated by consumer prices have not increased ahead of productivity, for instance, in Argentina, Brazil, Mexico or Peru, and have thus been no impediment to increased access to international markets. However, when expressed in dollars rather than local currency, or when observed in relation to producer prices, the gains are slighter, and in most cases competitiveness has declined (table 1). This is due to the effects of macroeconomic policy during the period, as in most countries this involved national currencies being kept overvalued owing to the need to reduce inflation and to the liberalization of capital flows. Part of the decline is explained by delays in adjusting the exchange rate. Meanwhile, domestic prices adapt at differing speeds to a more competitive economic environment: prices for traded goods, generally included in producer prices, adjust relatively quickly, while those for consumer goods, which are more influenced by non-traded goods and services, tend to be slower in adjusting. The result is that while labour costs expressed in consumer price terms did not rise, they actually increased very fast in relation to producer prices. This change in relative prices, while it lies outside the labour market sphere, does influence the dynamics of wage determination because it leads to the outlook of workers (based on the purchasing power of wages) diverging from that of those who operate businesses (based on profit margins). Furthermore, as the situation after mid-1997 clearly illustrates, competitiveness is also dependent on developments in other countries. Despite a rise of between 0.4% and 10% in the competitiveness of Latin American countries, their ability to compete with goods from the Asian countries deteriorated. Competitiveness gains in these countries were about 50% ranging from 20% in Thailand to 60% in Malaysia while among Latin American countries the largest increase, in Colombia, was about 10%. To sum up, productivity grew, as expected, as a consequence of the reform process, but some adjustments are still needed. Firstly, if international competitiveness is to be maintained, non-wage labour costs need to be examined. Secondly, macroeconomic policies, particularly overvalued exchange rates and relative prices, should be reviewed. Lastly, productivity gains have been insufficient to close the gap with competitors. b) Job creation A second effect of globalization has been inadequate job creation in relation to the rapid increase in the economically active population (EAP). On average, the nonagricultural EAP has grown by over 3% a year, partly as a result of increasing female participation in the wage economy (table 2). Job creation has lagged due to slow

12 CEPAL REVIEW 72 DECEMBER 2000 TABLE 2 Indicator Economic activity GNP a GNP per capita a Inflation a Population and employment Population a Total EAP a Urban EAP (%) Non-agricultural employment a Open unemployment rate Informal employment (%) b Public-sector employment (%) c Wages d Real manufacturing wages Real minimum wages Latin America: Economic activity, employment, wages and poverty (Annual growth rates and index) 1980 1985 1990 1995 1999 0.6 1.9 2.9 0.0-1.6-0.1 1.1-1.8 134.8 487.5 287.5 9.8 2.1 1.9 1.8 1.8 3.5 3.1 2.6 2.6 66.9 70.0 72.8 75.3 76.6 3.5 4.4 3.0 2.8 6.7 10.1 8.0 7.2 8.8 40.2 47.0 44.4 46.5 48.5 15.7 16.6 15.5 13.4 13.0 100.0 93.1 86.6 92.9 102.9 100.0 86.4 68.4 70.8 73.8 Poverty Percentage of households in poverty (%) Urbanization of poverty (%) 35.0 37.0 41.0 38.0 36.0 71.4 85.4 84.2 83.3 e Source: ILO, on the basis of national statistics. a Annual growth rates. d Index 1980 = 100. b Percentage of urban employment. e 1997 figure. c Percentage of total EAP. and erratic economic growth. The result has been rising unemployment. The average unemployment rate in Latin America rose from 6% in 1980 to 8.7% in 1983, i.e., during the first phase of adjustment. Unemployment fell from 1983 to 1992, but never returned to its 1980 level. After 1992 unemployment grew continuously, reaching 8.8% in 1999. These developments reveal not only the limited capacity of the region s economies to bring down unemployment, but also increased vulnerability, since continuous adjustments entail a return to previous higher levels of unemployment. By 1999, Latin American unemployment had returned to the high levels of the mid- 1980s. Four aspects should be taken into account in evaluating the way unemployment affects the people of Latin America. The first is that it can be misleading simply to compare the unemployment level with, for instance, the rates of over 10% prevailing in some OECD countries. Most countries lack unemployment insurance, and protection is generally occupation-linked. Joblessness means no income and no protection, and this is one of the main sources of social exclusion. Secondly, unemployment disproportionately affects women and young people. While the female unemployment rate is about 30% higher than the average, rates for young people are usually double the national figure. Unsurprisingly, women and young people account for a large proportion of the excluded. Thirdly, there are also large regional variations within countries. Adjustment tends to have a disproportionate effect on places where key sectors in need of restructuring are located. These activities generally constitute the main source of employment and production, and restructuring affects the whole region. The situation also differs from country to country. Size, the degree of modernization attained and the stage reached in the reform process are determining factors in unemployment. Small, open economies are more vulnerable to external fluctuations and tend to have higher and more erratic unemployment rates than larger, more closed economies (where internal demand plays the biggest role and provides more autonomy). Again, in countries that have reached an advanced stage of urbanization and modernization, labour markets mainly adjust through unemployment, while in those with a

CEPAL REVIEW 72 DECEMBER 2000 13 large agricultural population or small formal sector, underemployment is the main adjustment variable. Lastly, the stage reached in the reform process also matters. Early reformers have been the most successful in reducing unemployment, while latecomers particularly those that are now in the early phases of adjustment tend to have higher and rising unemployment. c) Changes in the employment structure In addition to a higher unemployment rate, reform has brought about profound changes in the structure of employment. Four main interrelated processes can be identified: privatization, the shift from goods-producing sectors to services, the increase in informal working, and the loss of job security. These processes can be seen to have taken place in the 1990s, when most countries were already beyond or well advanced in the adjustment process. Privatization introduced a major change in patterns of job creation in Latin America, owing to the role traditionally played by the public sector as the employer of last resort (something that will be discussed in the next section) and an important contributor to the development of the middle classes. Government did not directly contribute to employment growth in the 1990s. On the contrary, its share of urban employment fell in the region as a whole, from 15.5% in 1990 to 13.0% in 1999. This decrease does not include falls in publicsector employment that took place in earlier periods, as in Chile. This movement from public- to privatesector employment occurred in all countries, while in some including Argentina, Costa Rica and Panama the decline amounted to as much as five to ten percentage points. The employment shift from the public to the private sector was a direct consequence of the privatization and deregulation processes accompanying globalization. State enterprises were transferred to the private sector and government functions were reduced. It was also one of the main results of fiscal discipline, an important component of stabilization policy. Budget deficits were generally reduced by cutting public expenditure, mostly the payroll, through a series of wage and employment cuts (table 3). Generally speaking, however, the transfer of jobs was not towards larger private companies. Their share of total employment also declined over the same period, although at a slower pace than government employment. Between 1990 and 1998, the employment share accounted for by such companies fell from 40% to 39%, the bulk of this decline taking place in countries such as Brazil, Colombia and Venezuela. If small enterprises are excluded, furthermore, the decline amounts to two percentage points (ILO, 1998). Large enterprises (more than 100 employees) were the most affected by trade liberalization and the need to increase productivity (mostly through employment reduction). Only 17 out of every 100 new jobs created during the 1990s were contributed by such companies. Increased labour flexibility facilitated adjustment, but at the cost of a more erratic employment level, as is clearly illustrated by the 1% decline in employment in large and medium-sized enterprises in 1998, when these firms had to adjust to increased competition from Asian products (figure 1). The second of the processes referred to, the shift in employment from goods-producing sectors to services, was rapid in countries such as Bolivia, Costa Rica, Ecuador, Peru and Uruguay, where the share of manufacturing employment fell by between four and six percentage points during the 1990s. In other countries the process was slower because restructuring was at a more mature stage (Chile) or a gradual approach was followed (Brazil and Colombia) or, in cases like Panama, because the economy was small and already open. The new structural conditions resulting from the adjustment process have left these sectors more vulnerable to changes in competition. Manufacturing industry contracted in 1998 as a result of increased competition from Asian products. This contraction of output and employment was particularly large in food processing, textiles and clothing, shoes and machinery and equipment. The shift of employment from manufacturing to services is partly the result of increased competition in a more open economy. Falling employment has been accompanied by rising productivity which, particularly in the short run, can only be achieved by cutting jobs. The effect has mainly been felt in urban employment, since agriculture, fishing and mining tend to contribute to employment growth during the liberalization process. It cannot automatically be assumed that employment growth in the service sector means a shift towards low-productivity jobs. Some of the jobs created in the sector are in services that are integral to the modernization and globalization processes, such as finance, communications and trade. The productivity of these sectors is usually higher than that of manufacturing and can grow more rapidly. Unfortunately, this has not been

14 CEPAL REVIEW 72 DECEMBER 2000 TABLE 3 Latin America: Structure of urban employment, 1990 and 1998 (Percentages) Country and years Informal sector Formal sector Total Own-account Domestic Micro- Total Public Small, mediumworkers a service enterprises b sector sized and large private enterprises c Latin America 1990 Total 44.4 23.4 5.7 15.2 55.6 15.5 40.1 Male 41.2 22.8 0.5 17.9 58.8 Female 49.2 24.4 14.1 10.7 50.8 1998 Total 47.9 24.7 6.9 16.3 52.1 13.0 39.1 Male 45.0 24.9 0.6 19.6 55.0 Female 52.0 24.4 16.0 11.6 48.0 Argentina 1990 Total 52.0 27.5 5.7 18.8 48.0 19.3 28.7 Male 49.8 28.2 0.5 21.2 50.2 Female 55.5 26.5 14.3 14.7 44.5 1998 Total 49.3 22.7 6.4 20.3 50.7 12.7 38.0 Male 48.0 24.1 0.3 23.6 52.0 Female 51.4 20.4 15.8 15.2 48.6 Brazil 1990 Total 40.6 20.3 6.9 13.5 59.4 11.0 48.4 Male 36.1 19.6 0.5 16.0 63.9 Female 47.6 21.3 16.7 9.6 52.4 1998 Total 46.7 23.2 9.5 14.0 53.3 9.3 44.0 Male 43.0 25.1 1.0 16.8 57.0 Female 51.9 20.4 21.4 10.1 48.1 Chile 1990 Total 37.9 20.9 5.4 11.7 62.1 7.0 55.1 Male 33.5 21.3 0.2 12.0 66.5 Female 45.9 20.1 14.7 11.1 54.1 1998 Total 37.5 18.5 5.1 13.9 62.5 7.2 55.3 Male 32.9 19.2 0.1 13.6 67.1 Female 44.8 17.4 13.1 14.3 55.2 Colombia 1990 Total 45.7 24.1 2.0 19.5 54.3 9.6 44.7 Male 45.1 22.6 0.1 22.3 54.9 Female 46.6 26.3 5.0 15.2 53.4 1998 Total 49.0 28.1 2.1 18.8 51.0 8.2 42.8 Male 49.2 28.4 0.2 20.7 50.8 Female 48.8 27.7 4.7 16.4 51.2 Costa Rica 1990 Total 41.2 18.9 5.8 16.4 58.8 22.0 36.8 Male 37.7 19.1 0.3 18.3 62.3 Female 47.5 18.6 15.8 13.1 52.5 1998 Total 45.4 17.5 6.0 21.9 54.6 17.0 37.6 Male 42.2 16.5 0.3 25.3 57.8 Female 50.7 19.0 15.4 16.2 49.3 Ecuador 1990 Total 55.6 35.4 5.0 15.3 44.4 18.7 25.7 Male 51.7 32.6 0.7 18.4 48.3 Female 62.1 39.9 12.1 10.1 37.9 1998 Total 58.6 33.0 6.1 19.5 41.4 14.8 26.6 Male 54.5 28.9 1.0 24.6 45.5 Female 64.1 46.7 9.4 8.0 35.9 (continued on next page)

CEPAL REVIEW 72 DECEMBER 2000 15 Table 3 (continued) Country and years Informal sector Formal sector Total Own-account Domestic Micro- Total Public Small, mediumworkers a service enterprises b sector sized and large private enterprises c Honduras 1990 Total 57.6 37.3 7.1 13.3 42.4 14.9 27.5 Male 45.1 25.7 0.5 18.9 54.9 Female 72.0 50.5 14.6 6.9 28.0 1998 Total 57.9 37.0 5.0 15.9 42.1 10.3 31.8 Male 52.0 27.9 0.9 23.2 48.0 Female 64.1 46.7 9.4 8.0 35.9 Mexico 1990 Total 47.5 25.0 5.1 17.3 52.5 25.0 27.5 Male 46.6 25.1 0.8 20.7 53.4 Female 48.8 24.6 13.4 10.8 51.2 1998 Total 49.6 24.9 4.8 19.8 50.4 21.7 28.7 Male 48.1 23.7 0.2 24.2 51.9 Female 51.8 26.8 12.9 12.1 8.2 Panama 1990 Total 36.0 19.8 7.9 8.3 64.0 32.0 32.0 Male 34.6 23.8 1.0 9.7 65.4 Female 38.0 14.0 17.8 6.3 62.0 1998 Total 38.5 21.5 6.9 10.1 61.5 21.8 39.7 Male 35.9 22.8 1.3 11.9 64.1 Female 42.3 19.5 15.4 7.4 57.7 Peru d 1990 Total 52.7 33.4 4.9 14.5 47.3 11.6 35.7 Male 46.3 28.9 0.6 16.9 53.7 Female 62.9 40.4 11.6 10.8 37.1 1998 Total 53.7 30.2 5.5 18.0 46.3 7.2 39.1 Male 45.3 23.8 0.5 21.0 54.7 Female 64.6 38.7 11.9 14.0 35.4 Uruguay e 1990 Total 39.1 18.6 6.8 13.7 60.9 20.1 40.8 Male 33.7 18.6 0.2 15.0 66.3 Femae 46.6 18.5 16.2 11.8 53.4 1998 Total 41.2 20.1 7.5 13.6 58.8 16.8 42.0 Male 37.3 22.1 0.2 15.0 62.7 Female 46.4 17.5 17.2 11.7 53.6 Venezuela 1990 Total 38.6 22.3 3.9 12.4 61.4 22.3 39.1 Male 38.3 22.0 0.4 15.9 61.7 Female 39.3 22.8 10.4 6.1 60.7 1998 Total 43.0 28.9 4.7 9.4 57.0 19.0 38.0 Male 43.3 27.8 0.2 15.3 56.7 Female 46.6 28.4 11.4 6.8 53.4 Source: ILO estimates, based on country household surveys and other official sources (revised series). a Includes own-account workers (other than professional and technical workers) and unpaid family workers. b Employed in establishments of up to five workers. c Enterprises with six or more workers. d Metropolitan Lima. e Montevideo. the situation in Latin America in the recent past. Nine out of every ten new jobs created in the 1990s were in services, but 70% of these were in low-productivity services, chiefly personal, retail trade and transportation services in the informal sector. Under these circumstances, the shift to services means a decline in employment quality. The third major change in the employment structure in the 1990s was the shift from formal to informal employment. As was mentioned earlier, the limited job creation capacity of the formal economy, both public and private, left increasing numbers of people with no alternative but to find or create their own occupations in the informal sector; in the absence of insurance, un-

16 CEPAL REVIEW 72 DECEMBER 2000 FIGURE 1 Latin America (selected countries): Employment trends in the 1990s (Share in employment growth) Towards the tertiary sector Towards the informal sector From goods to services Goods From modern to informal Modern Services Informal Growth of informal services Modernization of the informal sector Modern services Microbusinesses Informal services Other informal activities employment is a luxury that very few can afford. Slow and erratic growth, and the shedding of labour by the public sector during adjustment, conspired against the creation of jobs in modern activities. As a result, the proportion of the workforce in informal employment expanded from 44% to 48% between 1990 and 1998. This includes own-account work, unpaid work in family businesses, domestic service and microenterprise (less than 5 employees). Only in Argentina, Chile and Honduras did informal employment not expand as a share of the total, while in the remaining countries informal employment grew twice as fast as total non-agricultural employment. In the region as a whole, 61 out of every 100 jobs created in the 1990s were informal. As was mentioned earlier, the great majority of new jobs in services were informal; furthermore, the most dynamic component of informal employment growth has been work in microenterprises. Of every 10 new informal jobs, more than three were contributed by microenterprises (figure 1). This could suggest a positive change within informal employment, since microenterprises are more highly organized than most informal activities and average incomes from microenterprises are higher than those of the rest of the informal sector, although not as high as those of the formal sector. Average incomes in microenterprises are about 90% of average incomes in modern activities generally, but only 55% of average incomes in medium-sized and large enterprises. Nevertheless, microenterprises are increasingly offering valid employment options. In 1998, for instance, they accounted for all new jobs created. Further analysis is needed, however, since although incomes are better, working conditions, job stability and social protection are far from being acceptable. Between 65% and 95% of those working in microenterprises do not have a written contract, and between 65% and 80% are not covered for health risks or old age. They tend to work longer hours and are more likely to have accidents at work. Breaches of basic labour rights (child labour, freedom of association, collective bargaining and forced labour) are also more frequent in establishments of this size than in larger ones. Of course, insecurity is not solely a characteristic of small enterprises; it is also to be found in medium-sized and large firms (ILO, 1998). The fourth process identified is the loss of job security resulting from increased competition in a more flexible labour environment. The search for cost reductions and flexibility to allow for improvements in competitiveness has led to labour law reforms introducing flexibility at the margins. For new jobs, non-standard contracts have been introduced as a less costly and more

CEPAL REVIEW 72 DECEMBER 2000 17 flexible alternative to the open-ended contracts that were once the norm. The resultant increase in flexibility and reduction in labour costs were expected to lead to growth in the number of waged jobs created. In the 1990s waged employment did indeed increase more rapidly than total employment, suggesting that the reform produced incentives to hiring. However, the social cost involved was increasing insecurity of employment. The introduction of non-standard labour contracts was accompanied by an increase in the number of workers without any written employment contract at all. It should be noted that neither nonstandard contracts nor the lack of any written legal contract automatically entail lower labour protection than standard contracts. Only the reform in Argentina made allowance for this reduction in temporary contracts, the existence of an employment relationship being subject to proof in the absence of a written contract. However, inspection and control become more difficult with temporary contracts. In the case of workers without contracts, many are unofficial and work for cash, so that their conditions of employment are almost impossible to check. This development, furthermore, has come about in a situation where labour inspection is generally weak, and because it is rigid contracts that are legally recognized as standard ones, the reform has meant that powers of guidance have been diminished. In 1996, workers without contracts or with nonstandard contracts accounted for 30% of all workers in Chile, 40% in Argentina and Colombia and 74% in Peru. Most worked in microenterprises: 50% in Chile, 65-70% in Argentina and Colombia and 80% in Peru. However, medium-sized and large enterprises recorded the largest proportion of non-standard contracts and significant percentages of workers without contracts: 6% in Chile, 11% in Peru and 32% in Argentina and Colombia. In the case of microenterprises, informal working and lack of employment security have a clear tendency to overlap, since both are mainly the result of inability to pay the costs of labour protection. With larger enterprises, the number of unregistered workers is an indication that the law is being circumvented (Tokman and Martínez, eds., 1999). Not only is the proportion of workers potentially or actually exposed to insecure employment conditions high, but in most countries insecure employment accounts for all job growth in the 1990s. Of the four countries analysed, only in Colombia was there an increase in open-ended employment; in Argentina, Chile and Peru there was a fall in the absolute numbers of such contracts. The exact nature of the transition from permanent to temporary employment differed from country to country. In Argentina, the decline in the number of open-ended contracts was entirely offset by growth in the number of workers without contracts, mainly in larger enterprises. In Peru, the decline in open-ended employment was compensated for in equal proportions by workers with temporary contracts and workers without contracts, mostly in microenterprises. In Chile, most new jobs were provided by larger enterprises under temporary contracts. The four processes described resulted in a decline in the quality of labour protection in the 1990s. Privatization, which could have been a positive development, was not so because of the inadequacy of job creation in modern private-sector companies. A shift towards tertiary employment is also a priori neutral, since good jobs in services could make up for a decline in available manufacturing employment. However, most of the new jobs in services were of low productivity. Increased informal working and insecure employment conditions clearly resulted in lower job quality, although this was somewhat offset by the rapid expansion of employment in microenterprises. The changes in the employment structure can be more clearly identified if looked at from a longer-term perspective. As can be seen in figure 2, 2 during the three decades prior to adjustment (1950-1980) an average of FIGURE 2 Latin America (selected countries): Sectoral contribution to job creation, 1950-1996 (Number of jobs contributed out of every 10 new jobs) 1950-1980 1980-1990 1990-1996 Public sector Modern sector Microbusiness Own-account working Domestic services 2 Owing to the nature of the available data, in the case of some countries the informal sector as defined for the purposes of figure 2 includes microbusinesses with up to 10 employees, and its employment share relates to urban employment. The revised series, in which the informal sector includes microbusinesses with up to five employees and is related to urban employment, does not permit of long-term comparison.

18 CEPAL REVIEW 72 DECEMBER 2000 60% of new jobs in Latin America were created by the formal sectors of the economy, with government accounting for 15% and medium-sized and large privatesector companies for 45%. The informal sector contributed 40% of new jobs, of which only 10% were in microenterprises (ILO, 1996). A substantial change in the employment structure occurred during the adjustment decade of the 1980s. The contribution made by employment in modern industries fell to two out of every ten new jobs, this decline being most pronounced in modern private-sector companies that had to adjust to a more open economy. The informal sector acted as a buffer: it doubled its contribution to job creation, mostly in microenterprises, where it more than tripled. The 1990s saw a recovery in labour absorption in larger private-sector companies and continuing growth in informal employment. To sum up, privatization has meant that publicsector employment is no longer contributing to labour absorption. Larger enterprises, while they have been recovering from the adjustment decade, are still well below the pre-adjustment level, and technological change and decentralization of production and employment mean that they are unlikely to be able to return to it. Indeed, business of all sizes account for the same 5.5 out of every 10 new jobs as they did in the preadjustment period. The difference is that the main contributors now are microenterprises (including small enterprises). This being the case, and informal and insecure employment still being the norm in the sector, this employment shift has led to a decline in job quality. d) Wage trends and differentials The adjustment process was expected to have two effects on wages. It was predicted that wage levels would increase as productivity grew, while wage differentials by skill level would narrow as the demand for unskilled labour increased because of the expansion of trade based on labour-intensive sectors. In 1990, both industrial and minimum wage levels were lower in real terms than they had been in 1980. In both cases, though, there was a recovery during the 1990s. This was mainly due to success in reducing inflation, which declined from three digits to less than 10% on average across Latin America. Latterly, productivity growth also contributed, particularly in the industrial sector. Nonetheless, as table 2 shows, minimum wages are still substantially lower than in 1980. Wage differentials have behaved in an unexpected manner, with the gaps between minimum and industrial wages and differences by skill or educational level tending to widen. Industrial wages grew by 1.4% a year between 1990 and 1997, while minimum wages increased by only 0.3%. Across Latin America, income differentials between professional and technical workers and those employed in low-productivity sectors increased from 40% to 60% on average between 1990 and 1994. This was the result of substantial growth in the real incomes of high-skilled workers in modern activities and slow increases or even declines in the wages of unskilled labour in low-productivity sectors. In eight out of ten countries for which data were available, the wage gap by skill level widened (ECLAC, 1997a). The same can also be seen when the wages of skilled workers are compared with those of blue-collar workers since 1988 (IDB, 1998). As wage gaps in Latin America widened over this period, exactly the opposite trend was being seen in the South-East Asian countries, despite the fact that in 1980 wage gaps in Latin America were already the largest in the world. By 1997, the wage gap in Latin America was 1.9 times as high as in developed countries and the South-East Asian countries. A number of explanations can be put forward for this unexpected development. The effect of capital liberalization on the prices of capital goods could have brought about an increase in investment and a concomitant demand for skilled labour. The expansion of imports from countries like China with an even greater abundance of unskilled labour than Latin America, and currency appreciation, which favoured growth in more skill-intensive non-tradable goods, are other factors (Lustig, 1998). In addition, studies done on Brazil, Chile and Peru (Meller and Tokman, 1996; Paes de Barros and others, 1996 and Saavedra, 1996) suggest that the maturity and characteristics of the trade liberalization process influence the evolution of wage differentials. In Chile, where the liberalization process was at a more mature stage, large enterprises were able to expand employment after 1984; in Brazil and Peru (two late starters in the process), large enterprises reduced employment in order to raise productivity and competitiveness, while most labour absorption took place in small enterprises and microenterprises. In Chile demand for skilled labour grew, while in the other two countries there was a shift of labour from higher- to lower-productivity enterprises and sectors, a process that was accompanied by net employment growth in Peru but a net contraction in Brazil.

CEPAL REVIEW 72 DECEMBER 2000 19 TABLE 4 Argentina, Chile, Colombia and Peru: Insecure employment Waged workers a Hourly cost of labour b Composition of changes in waged employment c On Without Total With Without With Open-ended Temporary Without Total change temporary contracts temporary contracts open contracts contracts contracts in waged contracts contracts -ended employment contracts Argentina 12.7 33.0 35.7 3.5 2.8 6.1-652.7 25.7 726.9 100.0 Chile 14.7 15.6 30.3 1.4 1.0 2.1-89.9 138.9 51.0 100.0 Colombia 8.3 31.0 39.3 1.9 1.6 3.3 81.9 13.3 4.8 100.0 Peru 32.6 41.1 73.7 1.4 1.1 2.1-19.3 56.8 62.6 100.0 Source: Tokman and Martínez (eds.) (1999) and ILO (1998). a As percentages of total waged employment. b In dollars. c As percentages of changes in waged employment between 1990 and 1996. In both cases, however, wages for unskilled labour declined, either as a result of this employment shift or because of the introduction of lower levels of labour protection. Workers in microenterprises earn an average of 30% to 50% less than those in larger establishments (ILO, 1997a), and the figure is still 20% even when personal characteristics are homogenized (IDB, 1998). However, large companies replacing workers on longterm contracts with temporary ones reduce wages by between 35% and 40%, and by an additional 15% to 30% if no written contract is drawn up (table 4). It is mainly unskilled workers who are switched to employment contracts of this type, and this practice has neutralized any demand effect that may have resulted from trade liberalization (ILO, 1998). e) Poverty and equity Poverty and inequality have increased during the reform process. Today, on average, there are more poor people and income differences are larger in Latin America than before. The trend has not been a continuous one. During the 1990s, when several countries had already completed the stabilization and trade liberalization phases, poverty fell in most of the countries for which data are available. Only in Argentina and Venezuela did the level of poverty rise, while in Mexico it remained constant. In the 13 remaining countries for which there are data, reported poverty fell (ECLAC, 1999). The level of poverty is still higher today than in 1980, and there has been no improvement in equity. On the contrary, income concentration has increased substantially since the early 1980s, so that the Gini coefficient is now at a level similar to that seen in 1970 (0.52). This is because the income share of the poorest quintile has declined while that of the highest quintile has risen continuously, a rise that was interrupted only between 1980 and 1983. The intermediate quintiles, while performing better than the poorest, have still not recovered the income shares they had at the beginning of the 1980s. In fact, of the two countries (Chile and Uruguay) that can show a significant decrease in poverty, only in Uruguay has equity increased at the same time. Income concentration in Latin America has historically been the highest in the world. At present, the income share of the top 5% is double that of the same group in industrialized countries, and more than 60% higher than in South-East Asian countries. At the other extreme, the income share of the poorest 30%, at 7.5%, is the lowest in the world, being just 60% of the equivalent level in industrialized and Asian countries (IDB, 1998). When a successful performer like Chile is compared to the United States, it is found that the income shares of the bottom 20% are similar (about 4.5%). However, to find a time when the shares of the upper 20% were comparable, we have to go back as far as 1929. If the Gini coefficient is calculated for 90% of the Latin American population (excluding the upper 10%) it is found to average 0.36, which is similar to the level seen in the United States, while in six of the countries it is actually lower than in the United States (IDB, 1998). This clearly shows that greater income concentration among the highest groups is a key explanatory factor. Of no less importance is the question of why globalization, and the adjustment package that accompanied it, did not help to bring Latin American equity levels closer to those of the rest of the world. Conventional wisdom, based on the pioneering studies of Kuznets, would lead one to expect that, after a period